When seeking funding for your business, conventional and SBA loans are typically the most debated options. Although they can both provide the financing you need, there are some key differences between the two.
SBA loans are guaranteed by the government, taking on the majority (up to 85%) of the lender’s risk when providing financing to small businesses. Because of that guarantee, banks are willing to present borrowers with generous repayment terms and interest rates, typically between 3% and 7%, which are lower than traditional loans, credit cards, and other alternative financing options.
Conventional loans are typically provided by banks and credit unions. Financial institutions provide qualified borrowers with a lump sum amount of cash that they then pay back over an agreed-to period of time. Qualifying for conventional loans is based on the borrower’s personal and business credit and because the lender takes on the full risk of financing, they look for excellent credit, strong financials established businesses with proven sells and a strong internet presence.
Small businesses are very unlikely to be approved for conventional loans which is why they seek out SBA loans.
How SBA and Conventional Loans Differ
There are some very key differences between SBA loans and conventional loans. One of the biggest differences involves the complexity of SBA loans.
Because SBA loans are backed by the government, they require more paperwork. The need for more paperwork inherently leads to longer turnaround times which means that conventional loans, if approved, are funded faster than SBA loans. However, the CDC was specifically designed to handle all of the paperwork associated with SBA loans, making the process a lot easier, even if longer, than it seems.
It is also easier to qualify for an SBA loan than it is for a conventional loan, so you’ll see business owners with less than perfect credit getting approved for SBA loans when they would be denied for conventional loans. SBA loans do require businesses and business owners to meet certain standards; however, the majority of those restrictions lie in the use of the loan rather than the credit score and financial history of the individuals.
One of the best differences is that the SBA is genuinely interested in the success of small businesses. They aren’t interested in having business owners default on the loan which means they are more likely to work with you if you fall behind on payments. They have processes and resources in place to walk business owners through the journey, whereas conventional lenders do not.
Depending on your situation, SBA loans could work for you. The low-interest rates and long repayment terms (10-25 years) are the best offered. Schedule a call with Growth Capital Team to see how we can help you.